Entrepreneurs: 6 things to know before talking to a bank
By Margaux Cervatius - 07 December 2021
Eureka! You’ve had a light bulb moment that could disrupt the market. After careful consideration, you decide to embark on an entrepreneurial project. Congratulations on taking the leap. Unfortunately, things are not that simple and you need to find a way to finance your project.
Like two-thirds of European startups, you rely mainly on your personal investments (PwC study). However, this method of financing is not sustainable in the long term. You consider all the available options: ask your friends and family, find business angels, apply for grants… And why not turn to your bank? Banks and startups are not incompatible entities, in fact, it’s quite the contrary. In order to be well prepared, here are six things you should know before meeting your banker.
Pitch your project clearly
The banker will not fund your project if they do not understand what it is about. You need to prepare a clear and well argued pitch to convince them. First of all, present your value proposition. Explain things clearly, as your banker may not be familiar with the technology you are using. If you are developing software or a mobile application, you can, for example, offer a demonstration of your product.
However, having a good idea is not enough. You must show that it will fit the market. Positioning is a key factor in a banker’s decision as it will determine the commercial success or failure of the startup. Several elements will help you define your positioning:
- the targeted sector
- the competitors (country, maturity level…)
- the type of target
- your competitive advantage over other players in the market
Defend your business model
The banker may be convinced by your project, but they must be sure that it is economically viable. Present your business model, i.e. how you intend to generate revenue. Be as specific as possible. For example, if your model is based on a subscription, give the target prices. Do not hesitate to justify your choices by referring to market studies.
Of course, your startup will not be immediately profitable. This is inherent to startups and their growth model. However, it is necessary to show the banker that your business model is viable in the long term.
Prepare a business growth plan
Provide your banker with a conservative scenario to show that your project has the potential to become a stable SME in a few years. Growth is key to gaining market shares and generating revenue later on. However, a growth plan that is too ambitious implies a greater degree of risk in the eyes of the banker. The banker will generally be more interested in stability than in rapid growth.
The business growth plan is also essential to show that you can anticipate business needs and manage cash flow. By providing figures and growth perspectives for your startup, you are more likely to gain the confidence of the bank.
Show your ability to generate cash flow
Your short-term financial situation is also important. Cash flow, i.e. the movement of cash in and out of a business, is a good way to assess its solvency and sustainability. If your cash flow is positive, it means that income exceeds expenditure. A surplus is generated, which can then be used to make investments or repay debts.
This may be the case for startups that are paid in real time by their customers, but pay their suppliers using a more traditional model, 30 or 60 days later. You can also show the banker that you are working with reliable customers who are able to pay on time. If you have large groups or public institutions among your clients, you can mention them and strengthen your case.
Value your ecosystem
However, before granting you a loan, the bank needs guarantees that go beyond the purely financial elements. You can highlight the mentors who support you or the renowned people who sit on your board. You can also show how your project is raising the interest of its ecosystem, through prizes won in innovation competitions or grants.
Another factor that should not be underestimated is media coverage. Indeed, a project that is young but has already been featured in several articles or news reports will have a better chance of convincing an investor. In the case of a B2C product, you can highlight your number of followers on social media, for example.
You can also talk about your clients and partners, especially when they are big names that everybody knows, but beware of name dropping. Focus on one or two names and explain in detail the nature of your relationship. For a customer, you can present the use case and the results your solution has brought, for example.
Be transparent about your capital structure
Transparency is essential to establish a healthy and lasting relationship with the bank. If you have already raised funds, provide all relevant information (amount raised, date, valuation). The profile of your existing investors can be a determining factor in the banker’s final decision. Indeed, the bank will be more or less open to funding your project depending on the investor profile.
Finally, it allows you to highlight your financial involvement in the startup. The bank invests in a startup, but also in its founder. The founder is often seen as the key man of the project, especially in the early years. Their early departure could jeopardise the success of the startup. The banker can be reassured if they see that the entrepreneur is secured with shares.
In order to make their decision, the banker needs to understand the opportunity and the business model. You need to show them that your project has strong market potential, but also that you will be able to manage your business in a sound and sustainable way. Your argument must therefore be based on financial and extra-financial elements, similar to the rating methodology developed by Early Metrics.